"Small Business Makes a Large Contribution"
Remarks by
Arthur Levitt, Chairman
U.S. Securities and Exchange Commission
Small Business Town Meeting
Richmond, Virginia
April 21, 1997
U.S. SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
Good afternoon. It's a special pleasure to be here today
with Congressman Tom Bliley, Chairman of the House Commerce
Committee; Small Business Administrator Aida Alvarez; and
Director of the Virginia State Corporation Commission's Division
of Securities Ronald Thomas. We're here today because we care
deeply about small business and we want to make sure we are doing
everything we can to make government more responsive to your
needs.
Like everyone in this room, I've had some experience with
small business. In the course of my life, I worked for a
community newspaper, helped establish a cattle company, started
two weekly newspapers, and founded a small brokerage firm that
became a large one.
I've savored success and experienced failure.
I've been sued by overzealous lawyers, and plagued by
irrational government regulations.
I've sweated through many payrolls, and worked many long
nights.
I've also engaged in the desperate search for capital. I
know the fear of having to mortgage your future, and your
family's future, to keep your business afloat and not give up on
your dream.
I know the risks -- and fortunately, I also know the
rewards.
Today, as Chairman of the Securities and Exchange
Commission, I STILL preach the gospel of small business to anyone
who will listen.
According to an article not long ago in Inc., "Most of the
20 million new jobs created during the past 15 years came not
from established giants, . . . [but] from the `independent
entrepreneurial sector.'" That is one of the most important
statistics I've ever heard.
You can see why I believe so deeply in the role of the
entrepreneur in America -- and why I was proud to organize and
Chair the first White House Conference on Small Business in 1980.
We wanted to bring legions of entrepreneurs to the seat of
government. Our goal was NOT to impress small business with the
power of Washington -- it was to impress Washington with the
power of SMALL BUSINESS. And judging by the parade of top
officials who attended our conference, they WERE impressed.
I'm not a top official -- in fact, compared to most federal
agencies, the SEC almost qualifies as a small business. But
despite our relatively small size, we've been working very hard
to try to understand and meet your needs. Let me give you an
idea how we do this.
Capital Formation
Small businesses need to raise capital, but as you know, the
capital formation process can be long and arduous. Most small
businesses are initially capitalized through the owner's personal
savings or loans. The SEC does not become involved at this
stage.
The next step in the search for capital is generally in the
form of loans and investments from friends, relatives, and
others. The securities laws allow companies to raise up to $1
million this way with NO federal regulation at all, beyond the
obvious rule that you can't defraud people.
Many small businesses move on to use banks, savings
institutions, and other financial companies to satisfy the need
for capital. If they sell stock, they generally begin with
venture capitalists, small business investment companies, and a
group of people known as "angels," probably because of the way
they can come to the rescue. If a company sticks to selling
stock in a non-public manner to sophisticated investors such as
these, it may raise more that $1 million without SEC
registration. This is known as a "private placement."
After this, it's not uncommon for a company to graduate to
selling securities to the public. If a company wants to sell
more than $1 million in stock, the SEC becomes involved. If the
amount is less than $5 million, we have a special small business
provision call Regulation A that allows you to "test the waters"
-- that is, to solicit interest in your stock offering before
going through the time and expense of filing with the SEC. If
the interest is sufficient, a company need only file a
streamlined information document with the SEC, in Question &
Answer format, without need for audited financial statements.
This document, or offering circular, is reviewed by the SEC staff
for completeness.
Beyond Regulation A, the SEC has special rules and forms
that permit small businesses to raise more than $5 million in a
relatively streamlined way. If all goes well at this stage, too,
the small business will likely graduate into a bigger business,
which is then subject to the normal SEC rules for selling
securities to the public.
As I noted earlier, we are constantly striving to understand
and meet needs of small business.
The 1980 White House Conference directed the SEC to host an
annual forum on capital formation specifically for small
business. It is a place where small businesses can voice their
concerns, especially about government regulations that might be
having an unintended, or inhibiting effect on small
entrepreneurs. It is a place where IDEAS can be raised, about
how capital can be raised.
Our SEC Forums try to reduce costs for you, through
cooperation among small business, federal and state agencies, and
regulatory bodies to achieve less burdensome regulation. The
Small Business Administration has been an important participant
in these forums.
These meetings have been held in Seattle, Atlanta, Phoenix,
and Providence, Rhode Island, as well as in Washington, D.C. This
coming September it will be held in San Francisco and next year
in Chicago.
Over the past 16 years, participants in our forums have
offered many ideas for improving our regulatory scheme. These
recommendations consistently reflect timely, real-life
experiences; but no matter how good they are, they amount to
little unless the government acts in response. I'm happy to be
able to tell you that many recommendations HAVE led to SEC
action. Let me give a few examples:
* As a result of a forum recommendation, we now exempt the
employee compensation arrangements of small companies from
registration with the SEC;
* Small businesses can now raise up to five million dollars in
a year through exempt public sales of securities using unaudited
financial statements -- this reduces the costs of filing
substantially;
* We have worked to facilitate the growth of company bulletin
board-based stock trading mechanisms, which help small companies
provide a more liquid market for shareholders; and we helped
facilitate the Small Business Administration's Angel Capital
Electronic Network. I expect Administrator Alvarez will discuss
this at greater length.
In addition to these forums, we're also undertaking a series
of town meetings -- of which this is the eighth -- to make sure
smaller businesses throughout the country are aware of the many
special opportunities that exist for them to raise capital.
After learning more about your concerns and problems in
raising capital in the securities markets, we attempt to design
programs that will meet your needs, while protecting investors.
As Director Thomas, knows we've been working with the states
to make it easier to raise capital. The state of California, for
example, made offerings of securities to sophisticated California
residents exempt from state registration requirements. But there
was no parallel federal exemption, so not long ago, we created
one. We'll gladly consider similar exemptions for other states.
As many of you know, the Commission also raised the
threshold, from $5 million to $10 million in assets, before a
company becomes "public", or, in other words, is required to
report to us regularly under the federal securities laws.
These exemptions make sense. But sometimes it's not enough
to exempt people from rules -- sometimes you have to CHANGE the
rules themselves. We haven't been shy about doing that, either.
In February, the SEC adopted new rules that I believe will
reduce the cost of private capital formation and especially
benefit small businesses. When securities are sold in private
placements, the purchaser must hold them for a period of time
before selling them in the public markets. Before, if you sold
stock privately, the purchaser had to hold the stock for 2 years;
now it is only 1 year.
Also in February the SEC proposed amendments to permit
certain smaller or less seasoned reporting companies to price
securities on a delayed basis after being reviewed by the SEC in
advance, if they meet specified conditions. The proposals are
intended to provide flexibility and efficiency to qualified
registrants, enabling them to time their offerings to
advantageous market conditions.
Simplification
Apart from re-examining our regulatory requirements to find
ways we can improve things for the thousands of companies that go
to market each year, we are also looking to make other changes
administratively:
* we have created a new headquarters unit that specializes in
small company filings and the needs of small businesses;
* we have appointed a special Small Business Ombudsman, Bill
Toomey, to answer your questions and act as your advocate at SEC
headquarters;
* we've put a special package of SEC information for small
businesses on-line at our World Wide Web site.
I encourage you to visit our site -- www.sec.gov. In
addition to the small business information, it contains investor
alerts, litigation releases, and access to our huge EDGAR
database of corporate information, which is an incredible
research tool for businesses of every size. It will also include
our new pamphlet -- "Q&A: Small Business and the SEC" -- a plain
English guide to help you understand the federal securities laws.
A copy of the pamphlet is in the materials we've given you today.
The Commission has also established a special electronic
mailbox on our Web site. We're hoping that you'll use it to send
us your best ideas about electronic prospectuses and other ways
to take advantage of new technology.
* * *
I've discussed many things this afternoon -- perhaps too
many. I hope I've given you a sense of how the SEC is working to
meet your needs today. This is a Commission that believes in
entrepreneurs and in the miracles they can and do perform.
When people focus too narrowly on the Fortune 500, I tell
them there's another group that's just as important -- the "Small
Business 21.5 Million."
When people try to gauge the health of the American economy,
I tell them to look not only at the Dow-Jones Industrial Average,
but also at the earnings of American sole proprietors and
partners -- which have grown dramatically over the past several
years.
And when a corporate CEO starts to get too self-important, I
remind him that during the last recession, it was not the
CAPTAINS of industry, but the FOOTSOLDIERS, who generated more
than 2 million new jobs -- large firms LOST about 4 million.
I believe in big business. I know how important it is to
the future of our nation. But I also know that the American
economy is the strongest in the world because it stands on TWO
legs, not one.
I thank you for your contribution, and look forward to
CONTINUING to work with you to find ways to lower the cost of
capital for you, the entrepreneurs on whom so much of our
nation's economic future depends.
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